Instructional Systems, Inc. v. Computer Curriculum Corp.

filed: September 16, 1994.

INSTRUCTIONAL SYSTEMS, INC., A CORPORATION OF THE STATE OF NEW JERSEYv.COMPUTER CURRICULUM CORPORATION, A CORPORATION OF THE STATE OF DELAWARE, INSTRUCTIONAL SYSTEMS, INC., APPELLANT, DEBORAH T. PORITZ,*FN* ATTORNEY GENERAL OF NEW JERSEY, INTERVENOR (PER THE COURT'S NOV. 19, 1993 ORDER); INSTRUCTIONAL SYSTEMS, INC., A CORPORATION OF THE STATE OF NEW JERSEY V. COMPUTER CURRICULUM CORPORATION, A CORPORATION OF THE STATE OF DELAWARE V. HON. ALFRED J. LECHNER, JR., UNITED STATES DISTRICT JUDGE FOR THE DISTRICT OF NEW JERSEY, NOMINAL RESPONDENT; DEBORAH T. PORITZ, *FN* ATTORNEY GENERAL OF NEW JERSEY, PETITIONER, INSTRUCTIONAL SYSTEMS, INC., A CORPORATION OF THE STATE OF NEW JERSEY, PETITIONER V. COMPUTER CURRICULUM CORPORATION, A CORPORATION OF THE STATE OF DELAWARE, HON. ALFRED J. LECHNER, JR., UNITED STATES DISTRICT JUDGE FOR THE DISTRICT OF NEW JERSEY, NOMINAL RESPONDENT; INSTRUCTIONAL SYSTEMS, INC., A CORPORATION OF THE STATE OF NEW JERSEY V. COMPUTER CURRICULUM CORPORATION, A CORPORATION OF THE STATE OF DELAWARE, INSTRUCTIONAL SYSTEMS, INC., APPELLANT; INSTRUCTIONAL SYSTEMS, INC., A CORPORATION OF THE STATE OF NEW JERSEY V. COMPUTER CURRICULUM CORPORATION, A CORPORATION OF THE STATE OF DELAWARE, DEBORAH T. PORITZ, ATTORNEY GENERAL OF NEW JERSEY, INTERVENOR IN D.C., APPELLANT

On Appeal from the United States District Court for the District of New Jersey. (D.C. Civ. No. 89-00502).

In a far-reaching opinion, the district court limited the application of the New Jersey Franchise Practices Act to the activities of a New Jersey franchisee within New Jersey on the ground that giving the Act extraterritorial effect would conflict with the dormant Commerce Clause. Before we reach this issue of first impression, we must wind through the present status of the law on Pullman abstention and an England reservation.

I.

FACTS AND PROCEDURAL HISTORY

The relevant facts are not disputed. Computer Curriculum Corporation (CCC), a Delaware corporation headquartered in Palo Alto, California, produces and markets an integrated learning system that uses computer technology to teach and monitor a student's progress. Since 1975, Instructional Systems, Inc. (ISI), a New Jersey corporation,*fn1 was CCC's exclusive distributor in the northeastern United States, subject to limited reservations by CCC. The parties entered into an agreement in 1984 that provided that ISI would be CCC's exclusive reseller in Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, Rhode Island, Vermont and Washington D.C., and that for its part ISI would sell only in those states and would deal only in CCC products. The Agreement provided that it would continue in effect until July 31, 1989. Finally, the Agreement provided that it "shall be construed and interpreted, and the legal relations created by it shall be determined, in accordance with the laws of the State of California." Jt. App. at 934.

As 1989 approached, CCC decided not to extend its relationship with ISI for the entire territory covered by the 1984 Agreement because, it claims, ISI was not aggressively marketing in some of the states. Instead, it offered ISI a two-year contract which limited ISI's market territory to New Jersey, New York and Massachusetts, thereby allowing CCC to distribute its products directly in the other (former ISI) states. ISI executed the 1989 Agreement under protest on January 30, 1989, and simultaneously filed its complaint in the Superior Court of New Jersey, Chancery Division.

The complaint contained seven counts. Count One alleged that the 1984 Agreement constituted a "franchise" for purposes of the New Jersey Franchise Practices Act ("NJFPA" or "Act"), N.J. Stat. Ann. § 56:10-3,*fn2 10-4,*fn3 and that CCC violated the NJFPA by (a) failing to renew without good cause in violation of Section 10-5,*fn4 and (b) attempting to impose unreasonable standards of performance upon ISI in the formation of the 1989 Agreement in violation of Section 10-7.*fn5 Counts Two through Seven alleged a variety of state common law claims.*fn6 As a remedy for each count, ISI sought an injunction restraining CCC from terminating its relationship with ISI and damages.

CCC removed the case to federal court on the basis of diversity of citizenship. In June 1989, following discovery, ISI moved for a preliminary injunction and partial summary judgment on the issue of whether the 1984 Agreement constituted a franchise agreement under the NJFPA. CCC opposed ISI's motions and filed a cross-motion for partial summary judgment, arguing that (1) California, not New Jersey, law applied to the 1984 Agreement; (2) application of the NJFPA to the franchise territory outside New Jersey would violate the dormant Commerce Clause; (3) the 1984 Agreement was not a franchise as defined by the NJFPA; and (4) CCC's actions were not in violation of the NJFPA. ISI responded by petitioning the district court to abstain pursuant to Railroad Commission v. Pullman, 312 U.S. 496, 85 L. Ed. 971, 61 S. Ct. 643 (1941), so that the NJFPA claim could be considered by the New Jersey courts.

The district court granted ISI's request for abstention over CCC's objection that the case could be resolved without reaching the constitutional questions raised by its motion for partial summary judgment. The court reasoned that "if the New Jersey courts determine ISI does not fit within the definitional requirements of a franchise or that the Franchise Practices Acts is inapplicable to States other than New Jersey, then the need to address the commerce clause question in this matter will be eliminated." Jt. App. at 577.

ISI filed a suit for declaratory judgment in the New Jersey Superior Court, Chancery Division on July 27, 1989. After additional discovery, both parties moved for summary judgment. The court entered a declaratory judgment in favor of ISI, holding (1) that New Jersey law applied to the 1984 Agreement despite the choice-of-law provision of the Agreement; (2) that the 1984 Agreement was a "franchise" for purposes of the NJFPA, and (3) that the NJFPA applied even though the agreement encompassed a multistate territory. See Instructional Sys., Inc. v. Computer Curriculum Corp., No. C-4116-89E (N.J. Super. Ct. Ch. Div. Oct. 30, 1989) (ISI I). The Appellate Division of the Superior Court reversed, see Instructional Sys., Inc. v. Computer Curriculum Corp., 243 N.J. Super. 53, 578 A.2d 876 (N.J. Super. Ct. App. Div. 1990) (ISI II), but the New Jersey Supreme Court reversed the Appellate Division and reinstated the judgment of the Chancery Division in October 1992, see Instructional Sys., Inc. v. Computer Curriculum Corp., 130 N.J. 324, 614 A.2d 124 (N.J. 1992) (ISI III).

The Supreme Court analyzed the issues before it in a series of questions. First, it decided what a franchise was under the NJFPA. Then it proceeded with the threshold choice-of-law question, holding that although "a close question," the trial court had not erred in applying New Jersey law because New Jersey has a strong policy in favor of protecting its franchisees and because the franchisee is located in New Jersey, the majority of its employees reside in New Jersey, the investments relate primarily to assets in New Jersey, and the goodwill was developed for CCC by New Jersey residents. Id. at 135.

The Court then proceeded to determine whether the evidence was sufficient to find the statutory requirements for the existence of a franchise, which depended on whether ISI had a "place of business" in New Jersey, a "license," and a "community of interest" with CCC. Finding that these were all satisfied, see id. at 136-46, the Court then turned to the question whether the Act has "extraterritorial reach to the franchise activities in states other than New Jersey." Id. at 146. The Court reasoned that at its core, the NJFPA "is meant to deal with the unconscionable business practices affecting New Jersey franchises," id. at 147, but that in meeting that purpose, the application of the Act did not stop at New Jersey's border. In its consideration of this issue, the Court discussed whether the application of New Jersey law in this manner would be consistent with the Commerce Clause. It reasoned that "New Jersey has no power, and therefore no interest, to regulate commerce that occurs entirely beyond its borders," but that this statute was regulating only "in-state conduct that has out-of-state effects." Id. at 146. The Court thus saw no unconstitutionality under the Commerce Clause or Due Process Clause "despite some incidental extraterritorial effects." Id. at 148.

The case then returned to the district court. CCC moved for partial summary judgment as to that portion of Count One that was based on application of the NJFPA outside of New Jersey. The district court gave notice of the attack on the constitutionality of the NJFPA to the Attorney General of New Jersey, see 28 U.S.C. § 2403(b) (1988), who chose to participate but did not formally intervene. On June 2, 1993, the district court granted CCC's motion for partial summary judgment as to the portion of Count One that sought to enjoin CCC from terminating ISI's franchise in states other than New Jersey. The district court's ruling was based on its determination that application of the NJFPA outside New Jersey was a per se violation of the Commerce Clause. See Instructional Sys., Inc. v. Computer Curriculum Corp., 826 F. Supp. 831, 848 (D.N.J. 1993) (ISI IV). ISI and the Attorney General appealed.*fn7

CCC then moved for summary judgment on the six remaining common law claims as well as the remainder of Count One. The district court granted partial summary judgment on the common law claims on November 9, 1993, leaving for trial only that portion of Count One that which alleged that CCC has imposed unreasonable terms and conditions on ISI in the 1989 Agreement as regards to New Jersey. See Instructional Sys., Inc. v. Computer Curriculum Corp., No. 89-502(AJL) (D.N.J. Nov. 9, 1993) (ISI V). ISI appealed.*fn8

On appeal, this court granted the Attorney General's motion to intervene in No. 93-5414, and consolidated the five related appeals and petitions for Disposition. We have jurisdiction over the appeals docketed at Nos. 93-5414, 93-5722 and 94-5048 pursuant to 28 U.S.C. § 1291 (1988).*fn9 Because the questions on appeal are legal, we exercise plenary review.

II.

Discussion

A.

Abstention, Reservation and Preclusion

ISI contends that we are bound to accept not only the New Jersey Supreme Court's decision on the scope of the NJFPA and its application to its arrangement with CCC but also that Court's Conclusion that such an application did not violate the dormant Commerce Clause, as CCC had argued. CCC would limit not only the effect of the New Jersey courts' interpretation of the federal constitutional issue, but also their interpretation of the state law ...

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